Argued June 8, 1922
Decided July 12, 1922
Bayard J. Stedman and Charles F. Blair for appellant. John A. Van Arsdale for respondent.
This action was brought by the plaintiff, as trustee in bankruptcy of the Marvel Oil Burner Company, under section 60 of the Bankruptcy Act to avoid as preferential a transfer of certain property claimed to have been transferred to defendant by the bankrupt within four months of an adjudication of bankruptcy and when the transferor was insolvent to the knowledge of defendant, and to recover the value of such property. One of the items of property claimed to have been thus transferred consisted of goods, wares and merchandise of the value of $572.23 and which were applied in payment of an antecedent indebtedness. The other item consisted of the sum of $6,995, which had been paid by the bankrupt to the defendant as advance payment on a contract and which was standing to the credit of the former on the books of the latter and which credit was balanced by charging against the same a claim of the defendant for work and expenses. The trial justice on a motion made by each side directed a verdict for the full amount of these items and we think that this action was fully justified so far as the $572.23 is concerned, but on the contrary we think that there was no basis for such direction of a verdict so far as concerns the other item.
The controlling facts which have given rise to the controversy over this item are as follows:
The bankrupt made a contract with the defendant under which the latter was to manufacture for it certain articles and the bankrupt was to make and did make advance payments on this contract which were to be applied to the satisfaction of the purchase price of the articles to be manufactured in a certain manner. The defendant did not manufacture the articles as agreed and at a certain date shortly before the adjudication of bankruptcy there was standing to the credit of the bankrupt on account of these advance payments the sum of $6,995. Defendant then made the proposition that there should be charged up against this credit and for the purpose of balancing it an equal amount for work and material claimed to have been furnished for the benefit of the bankrupt. The bankrupt assented to this proposition and the account was thus balanced.
The basis of plaintiff's claim in respect of this item is that the moneys paid by the bankrupt as advance payment on its contract constituted in some way a trust fund in the hands of the defendant and that the bankrupt thus having the real, equitable title to said funds although in the hands of the defendant could not transfer the same in payment of an antecedent indebtedness at the time it did. If the premises of the plaintiff were good his conclusions would be amply justified but we are unable to agree with his premises and thus the conclusions which have been based thereon fall. We know of no principle or authority under which moneys paid in advance on a contract to be performed by the payee become a trust fund in the latter's hands where as in the present case they are not kept as a separate fund but are simply credited to the payer. The legal aspect of such a transaction is that the one pays to the other a certain sum of money in consideration of which the latter agrees, as in this case, to make and deliver certain articles. The result of the transaction is that if the payee defaults on his agreement the one paying has a cause of action in some form for breach of contract or to recover back the moneys which he has paid. But his right thus to recover is based upon the failure of the payee to do as he agreed to do in consideration of the payment to him of the moneys and is not based on any theory that the one paying retained the legal or equitable title to the moneys which were paid.
The validity of the claim which defendant charged up against the balance due from defendant to the bankrupt on account of the advance payments in question was not disputed on the trial. Therefore, assuming that it was an honest claim, the defendant in offsetting its claim against that possessed by the bankrupt did no more than it was entitled to do under the provision of the Bankruptcy Act (Sec. 68).
The judgments, therefore, should be reversed and new trial granted, with costs to abide event unless the plaintiff consents to a modification thereof by reducing the amount of damages to the sum of $572.23 with interest from December 9, 1918, and in which case the judgments as so modified are affirmed, with costs to the appellant in this court and the Appellate Division.
HOGAN, CARDOZO, POUND, McLAUGHLIN, CRANE and ANDREWS, JJ., concur.